BAB, Inc. BABB
April 05, 2016 - 4:19pm EST by
anton613
2016 2017
Price: 0.60 EPS .05 .06
Shares Out. (in M): 7 P/E 12 10
Market Cap (in $M): 4 P/FCF 12 10
Net Debt (in $M): 4 EBIT 0 0
TEV ($): 4 TEV/EBIT 11 9.7

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  • Personal Account Idea
  • Micro Cap
 

Description

Bab, Inc. (BABB) is the perfect company to own in the current low rate environment. The Company has minimal capital requirements and has a consistent record of paying out its earnings in dividends, giving it a yield of 8.3%, based on last year's pay out. Yes, it's a small Company with limited liquidity but it's a significant bargain that cannot be found in the macro world. The business is extremely straight forward and is easily understood and analyzed. There is no complicated technology or cloud-based growth analysis here.

 

The Company was established in 1992 primarily to franchise out Big Apple Bagels stores. In 1997 it acquired  the rights to My Favorite Muffin stores.  The Company primarily licenses Big Apple and My Favorite Muffin stores. As of November 2015, the Company had 84 franchised units and 3 licensed units in 23 states and one international location. In addition, it had seven units under development. The Company also derives income from the sale of its trademark bagels, muffins and coffee (Brewster's) through non traditional channels of distribution, including a licensing agreement with Kohr Brothers.

 

The BABB franchised brand consists of "Big Apple Bagels", featuring daily freshly baked bagels, flavored cream cheeses, premium coffees, gourmet bagel sandwiches and other associated products. Licensed Big Apple units serve frozen bagels and other licensed products. The Big Apple Bagel units are primarily concentrated in the Midwest and Western United States. In the past few years the Company has made a concerted effort to eliminate poorly performing franchises, hence the total number of franchises has tended to decrease. Over the last few quarters the number of franchises looks like it's stabilizing.

 

My Favorite Muffin franchises feature a variety of freshly baked muffins, coffees and related products and units operating My Favorite Muffin and Bagel Cafe feature these products as well as  a variety of freshly baked bagels sandwiches.SD frozen yogurt can be added to either the Bagel or Muffin franchises as an additional brand. Brewster's Coffee products  are also sold in most franchises.

 

The Company assesses a $25,000 initial franchise fee for the first store and $20,000 for each additional store. In addition there is an ongoing 5% royalty on net sales and a 3% ongoing fee to fund the system-wide marketing fund. 

 

In  2014, a Master Franchise Agreement (MFA) was entered with a Dubai Company which includes ten Middle Eastern countries. BABB received a $200,000 franchise fee as payment for the first 15 locations opened. Franchisees will pay a 3% franchise fee, of which 50% will go to BABB and the rest to the Master Franchisee. The first Big Apple international location was opened in November 2015. It doesn't sound like a great deal for BABB, but it gives the Company its first international exposure.

 

Of course, this is a very competitive business but BABB is fairly well established in its region given its 24 year operating history. As investors, at the current valuation we are not so much looking for growth but stability so that we can collect a consistent payout. But, we believe the growth will also come and will obviously be a significant additional benefit. My point is that we don't need it to justify an investment in the shares.

 

The Company has only 17 employees, operates no franchises on its own and simply collects the fees and runs the marketing program. It's not a bad deal. The franchisees do all the work and you collect a nice fee for simply their use of your brand name. The capital requirements are minimal and earnings basically flow to the owners. 

 

Results

The Company just released first quarter results (February 2016) and performance was excellent. Total revenue was up 18% versus last year, driven by a volatile 70% increase in licensing fees. EPS was over $.01 per share versus a loss  last year, driven by a lawsuit settlement last year. The Company seems well on track to deliver the $.05 per share we anticipate this year, which in all likelihood will paid out as dividends. 

 

Value

With a trading price of $.60 and $.05 in earnings the shares trade at 12X earnings, which is extremely cheap relative to any large successful franchise you compare it to. With the earnings expected to paid in dividends, as in past years, the dividend yield is 8.3%. The balance sheet (as of November 2015) is solid with $1.26 million in cash and minimal debt ($33,400). BABB is simply a cash generation machine operating in a stable business.

 

Management owns 35.7% of the shares, pay themselves reasonable salaries and is committed to rewarding shareholders with continued dividends. 

 

Risks

 

1) This ia a micro cap with limited liquidity.

2) A larger competitor could inflict significant damage on the Company.

3) Management has essential control of the Company with their large position.

 

 

 

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

1) The Company's undervaluation.

2) Significant future growth could attract investors.

3) Management may simply decide to take it private near the current cheap valuation.

4) Do we really need a catalyst given the nice dividend we are collecting?

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    Description

    Bab, Inc. (BABB) is the perfect company to own in the current low rate environment. The Company has minimal capital requirements and has a consistent record of paying out its earnings in dividends, giving it a yield of 8.3%, based on last year's pay out. Yes, it's a small Company with limited liquidity but it's a significant bargain that cannot be found in the macro world. The business is extremely straight forward and is easily understood and analyzed. There is no complicated technology or cloud-based growth analysis here.

     

    The Company was established in 1992 primarily to franchise out Big Apple Bagels stores. In 1997 it acquired  the rights to My Favorite Muffin stores.  The Company primarily licenses Big Apple and My Favorite Muffin stores. As of November 2015, the Company had 84 franchised units and 3 licensed units in 23 states and one international location. In addition, it had seven units under development. The Company also derives income from the sale of its trademark bagels, muffins and coffee (Brewster's) through non traditional channels of distribution, including a licensing agreement with Kohr Brothers.

     

    The BABB franchised brand consists of "Big Apple Bagels", featuring daily freshly baked bagels, flavored cream cheeses, premium coffees, gourmet bagel sandwiches and other associated products. Licensed Big Apple units serve frozen bagels and other licensed products. The Big Apple Bagel units are primarily concentrated in the Midwest and Western United States. In the past few years the Company has made a concerted effort to eliminate poorly performing franchises, hence the total number of franchises has tended to decrease. Over the last few quarters the number of franchises looks like it's stabilizing.

     

    My Favorite Muffin franchises feature a variety of freshly baked muffins, coffees and related products and units operating My Favorite Muffin and Bagel Cafe feature these products as well as  a variety of freshly baked bagels sandwiches.SD frozen yogurt can be added to either the Bagel or Muffin franchises as an additional brand. Brewster's Coffee products  are also sold in most franchises.

     

    The Company assesses a $25,000 initial franchise fee for the first store and $20,000 for each additional store. In addition there is an ongoing 5% royalty on net sales and a 3% ongoing fee to fund the system-wide marketing fund. 

     

    In  2014, a Master Franchise Agreement (MFA) was entered with a Dubai Company which includes ten Middle Eastern countries. BABB received a $200,000 franchise fee as payment for the first 15 locations opened. Franchisees will pay a 3% franchise fee, of which 50% will go to BABB and the rest to the Master Franchisee. The first Big Apple international location was opened in November 2015. It doesn't sound like a great deal for BABB, but it gives the Company its first international exposure.

     

    Of course, this is a very competitive business but BABB is fairly well established in its region given its 24 year operating history. As investors, at the current valuation we are not so much looking for growth but stability so that we can collect a consistent payout. But, we believe the growth will also come and will obviously be a significant additional benefit. My point is that we don't need it to justify an investment in the shares.

     

    The Company has only 17 employees, operates no franchises on its own and simply collects the fees and runs the marketing program. It's not a bad deal. The franchisees do all the work and you collect a nice fee for simply their use of your brand name. The capital requirements are minimal and earnings basically flow to the owners. 

     

    Results

    The Company just released first quarter results (February 2016) and performance was excellent. Total revenue was up 18% versus last year, driven by a volatile 70% increase in licensing fees. EPS was over $.01 per share versus a loss  last year, driven by a lawsuit settlement last year. The Company seems well on track to deliver the $.05 per share we anticipate this year, which in all likelihood will paid out as dividends. 

     

    Value

    With a trading price of $.60 and $.05 in earnings the shares trade at 12X earnings, which is extremely cheap relative to any large successful franchise you compare it to. With the earnings expected to paid in dividends, as in past years, the dividend yield is 8.3%. The balance sheet (as of November 2015) is solid with $1.26 million in cash and minimal debt ($33,400). BABB is simply a cash generation machine operating in a stable business.

     

    Management owns 35.7% of the shares, pay themselves reasonable salaries and is committed to rewarding shareholders with continued dividends. 

     

    Risks

     

    1) This ia a micro cap with limited liquidity.

    2) A larger competitor could inflict significant damage on the Company.

    3) Management has essential control of the Company with their large position.

     

     

     

     

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    1) The Company's undervaluation.

    2) Significant future growth could attract investors.

    3) Management may simply decide to take it private near the current cheap valuation.

    4) Do we really need a catalyst given the nice dividend we are collecting?

    Messages


    SubjectGrowth? History of related party transactions / corp gov?
    Entry04/05/2016 04:43 PM
    MemberAres

    Anton, thank you for an interesting write up.  Could you please talk more about your growth outlook and what gives you comfort that growth woudl materialize?

    Have you studied the company's history in terms of self-dealing and related party transactions?  How would you evaluate its corp gov? 

    Thx!

    Ares


    SubjectRe: Growth? History of related party transactions / corp gov?
    Entry04/05/2016 05:11 PM
    Memberanton613

    Hi Ares,

    As I said in the write up, the growth would be a great benefit, but not necessary to buy the shares. The Middle East deal is the first time they have really tried to expand the reach of the Company and is a good indication they are starting to think about growth.

    I think their focus has been on profitability rather than growth. If they can get rid of all the laggards, then I think growth will come. My feeling is that we are close to this point.

    I have spoken to Mike Murtaugh, VP and General Counsel, numerous times and have found him to be honest and a straight shooter. Bad Companies tend not to pay dividends but pay themselves with huge salaries, which is not the case here. I think the Company is being run for the benefit of all shareholders.

     

    Best,

     

    Anton

     


    SubjectRe: Re: Growth? History of related party transactions / corp gov?
    Entry04/05/2016 11:02 PM
    MemberAres

    Thank you, Anton. 

    Whom would you consider as good comps among small and micro universe?  Noble Roman comes to mind.  Have you compared them?  

    Thx. 

    Ares


    SubjectRe: Re: Re: Growth? History of related party transactions / corp gov?
    Entry04/07/2016 07:46 PM
    Memberanton613

    Like most of these tiny companies there is no perfect comp, but I would look at the major restaurant franchisers and see what you have to pay for a dollar of earnings. You will find it is materially higher than BABB, even companies with a much shorter operating history. I know there is a liquidity premium but wow! What a premium.


    SubjectRe: Re: Growth? History of related party transactions / corp gov?
    Entry04/07/2016 08:36 PM
    Membershoobity

    Can you explain the concept of the laggards in terms of a franchising business.

    Are you saying they replace that one with a similarly located one? 

    Outside of the fact that a laggard would produce less revenue, it is still revenue right and it's almost all profit...or maybe not given the marketing spend?


    SubjectRe: Re: Re: Growth? History of related party transactions / corp gov?
    Entry04/08/2016 07:52 PM
    Memberanton613

    Shoobity,

     

    The laggards are simply not profitable. Whether it's the manager or the location, they simply will not stay in business for long. Yes. BABB continues to make it"s franchise fee but there is no longevity. The unit willl shut down sooner or later and produce nothing. It's not good for their business in the long run to have owners losing money.

    Profitable units attract more franchise sales and generate growth. In addition, profitable growing unit generate more fees.

     

    Anton

     

     


    SubjectRe: Re: Re: Re: Growth? History of related party transactions / corp gov?
    Entry04/09/2016 01:27 PM
    Membershoobity

    I see, I didn't take laggards to mean losing money and closing down so there's the answer thank you. 

    I'm still not sure how shutting down profitable (to BAB) stores leads to growth unless you replace those stores with better ones...I guess that's really the essence of your argument. 


    SubjectRe: Re: Re: Re: Re: Growth? History of related party transactions / corp gov?
    Entry04/09/2016 08:34 PM
    Memberanton613

    Absolutely! Hopefully they learn something from their mistakes. 


    SubjectRe: Re: Re: Re: Re: Re: Growth? History of related party transactions / corp gov?
    Entry04/10/2016 10:04 AM
    Memberjm671

    wasn't an activist involved here in the past?  thanks


    SubjectRe: Re: Re: Re: Re: Re: Re: Growth? History of related party transactions / corp gov?
    Entry04/10/2016 07:43 PM
    Memberanton613

    Not in the last decade or so since I have been involved. There have been some inquiries about purchasing the Company by some well known people, but they have gone nowhere. 

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